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The detail tables for January 2012 monetary statistics published by the People’s Bank of China shows that the position for FX purchase reversed rise in January, reversing the downward trend in the last quarter of 2011. The position for FX purchase increased by RMB141 billion for January.

However, the increase can largely be attributable to the trade surplus for January, which came in surprisingly higher. Excluding trade surplus, capital flow remains negative, but the magnitude of outflow has been greatly reduced. On an ex-trade-surplus basis, capital flow would be negative RMB31 billion, much smaller than previous 3 months. Thus even though outflow continued, it has been slowing down greatly into the “normal” range that we have saw in non-crisis times.

Again, as stressed before that continuous outflow would introduce tightening bias to monetary condition. Thus it is important to look at this measure to see if outflow continues in the coming months. I would expect more cuts in reserve requirement ratio for this year if outflow proves to be persistent.